The Federal Reserve has kept interest rates steady but are prepared to raise rates again in November – and this will be “an error of judgement,” predicts the CEO and founder of one of the world’s largest independent financial advisory, asset management and fintech organizations.
The prediction from deVere Group’s Nigel Green comes as the US central bank confirms the lower bound at 5.25% and the upper bound at 5.50%.
He comments: “The Fed has kept interest rates unchanged this time around, as was widely predicted by analysts and which was priced-in by the markets.
“As such, investors were less interested in this decision, but much more so on what Chair Jerome Powell and Fed policymakers hinted at for the future path.”
The deVere CEO continues: “He was, unsurprisingly, keen to stress that the war on inflation isn’t yet won.
“This lack of obvious decisiveness was deliberate to avoid a major market reaction, which would make their task of cooling the world’s largest economy harder.
“The US central bank, still a long way from its 2% target, will be concerned about the resilience of the economy and the markets, despite its efforts to cool them by making borrowing costs more expensive with the most aggressive policy tightening agenda in decades.”
This scenario leads Nigel Green to expect that the Federal Reserve will hike rates again this year.
“We believe the Fed isn’t done yet.
“We expect it will resume its hiking programme in November. But this, we believe, would be an error of judgement and could leave scars on the US economy,” he notes.
“The time lag for monetary policies is incredibly lengthy. It takes around two years for the full effect of rate hikes to make their way into the economy.
“We’re now starting to see the drag effects on the US economy with households and businesses becoming considerably more prudent. In addition, investors are becoming more and more concerned that additional hikes could steer the US economy into a recession.”
Further stifling growth through the cost of capital becoming prohibitive for companies and consumers leads to a decline in capital formation, reduced entrepreneurial activity, investment and innovation. “These effects hinder future growth potential and undermine an economy’s competitiveness on the global stage.”
The deVere CEO concludes: “Should more interest rate hikes further squeeze economic growth, the longer-term consequences will be far worse than higher for a bit longer inflation, which is already coming down – we’re in the end game already.
“The Fed would be making a huge mistake to resume hikes in November.”
